Mortgage Interest Deduction Rules
Deduction limits, acquisition debt rules, HELOC deductibility, and points for 2025-2026
Key Numbers
Post-2017 Limit
$750K
Pre-2017 Limit
$1M (Grandfathered)
HELOC
Home Improvement Only
PMI Deductible
Starting 2026
The mortgage interest deduction allows homeowners who itemize (Schedule A) to deduct interest paid on loans secured by their primary residence or second home. The One Big Beautiful Bill Act (OBBBA), signed July 2025, made the $750,000 debt limit permanent and reinstated PMI deductibility starting in 2026.
Acquisition Debt Limits by Loan Date
| Loan Origination Date | MFJ / Single Limit | MFS Limit |
|---|---|---|
| Before Oct 14, 1987 | No limit | No limit |
| Oct 14, 1987 – Dec 15, 2017 | $1,000,000 | $500,000 |
| After Dec 15, 2017 (permanent) | $750,000 | $375,000 |
Requirements
Must Itemize: You must file Schedule A. If your total itemized deductions don't exceed the standard deduction ($32,200 MFJ / $16,100 single for 2026), the mortgage interest deduction provides no benefit.
Acquisition Debt Only: Funds must be used to buy, build, or substantially improve the home securing the loan. Debt used for other purposes (consolidation, tuition, etc.) does not qualify.
Qualified Homes: Deduction applies to your primary residence and one second home. The debt limit is a combined total across both properties.
PMI Deduction — New for 2026
| PMI Detail | Rule |
|---|---|
| Effective Date | Tax year 2026 (contracts issued after 2006) |
| Full Deduction | AGI ≤ $100,000 ($50,000 MFS) |
| Phaseout | Reduces 10% per $1,000 above threshold |
| Fully Phased Out | AGI ≥ $110,000 ($55,000 MFS) |
Covers private mortgage insurance (PMI), FHA mortgage insurance premiums (MIP), VA funding fees, and USDA guarantee fees on acquisition debt.
Debt Limits & Refinancing
If your mortgage debt exceeds the applicable limit, only the interest on the portion within the limit is deductible. Special rules apply when refinancing grandfathered pre-TCJA loans.
Refinancing Grandfathered Debt
| Scenario | Limit Applied |
|---|---|
| Refinance ≤ old balance | $1M limit preserved (for remaining original term) |
| Cash-out portion above old balance | $750K limit applies to cash-out amount |
| Extended term beyond original | $750K limit applies after original term ends |
Term trap: If you have 10 years left on a grandfathered $1M mortgage and refinance into a new 30-year loan, the $1M limit only lasts for the first 10 years. From year 11 onward, the $750K limit applies.
Binding Contract Exception
If you had a written binding contract before Dec 15, 2017, and closed before April 1, 2018, the loan qualifies for the $1 million limit even though it closed after the TCJA cutoff date.
Second Home Rules
Mortgage interest on a second home is deductible under the same rules as your primary residence. However, the debt limit applies to the combined total across both homes — not per property. You can designate only one property as your second home at a time; if you own more than two, you choose which qualifies each year.
HELOC & Home Equity Rules
Home equity loan and HELOC interest is deductible only if the funds are used to buy, build, or substantially improve the home securing the loan. When used for qualifying purposes, the debt is classified as acquisition debt and counts toward your overall limit.
HELOC Deductibility by Tax Year
| Tax Year | Rule |
|---|---|
| Before 2018 | Deductible regardless of use (up to $100K equity debt limit) |
| 2018 – 2025 | Only deductible if used to buy, build, or substantially improve home |
| 2026+ | Same as 2018–2025 — OBBBA made current rules permanent |
What Qualifies as “Substantially Improve”?
Qualifies (Adds Value / Extends Life)
Kitchen or bathroom remodel, room additions, new roof or siding, HVAC replacement, swimming pool, basement finishing, major structural changes
Does Not Qualify (Maintenance / Non-Home)
Painting, fixing leaks, replacing broken appliances, routine maintenance, debt consolidation, tuition, car purchases, vacations
Keep records — IRS requires “tracing”: If HELOC funds are deposited into a general account and used for multiple purposes, you must trace which expenses qualify. Retain invoices, contracts, and bank statements showing direct use of funds.
Combined Limit Example
Jane has a $600,000 mortgage and takes a $100,000 HELOC for a kitchen renovation. Her total acquisition debt is $700,000 — within the $750,000 limit, so all interest is deductible. If she had used the HELOC for a car instead, only the mortgage interest ($600K) would qualify.
Points & Origination Fees
Mortgage points (prepaid interest) are generally deductible. Whether you deduct them in full the year paid or amortize over the loan term depends on the loan type and property.
Points Deduction by Loan Type
| Loan Type | Deduction Method |
|---|---|
| Purchase — Main Home | Fully deductible in year paid |
| Home Improvement — Main Home | Fully deductible in year paid |
| Refinance — Main Home | Amortized over life of loan |
| Second Home (any type) | Amortized over life of loan |
Full Deduction Requirements
To deduct purchase points in full the year paid, all of these must be true: the loan is secured by and used to buy or build your main home, paying points is an established practice in your area at amounts not exceeding the norm, you use the cash method of accounting, and points are computed as a percentage of loan principal.
Amortization Example
| Detail | Amount |
|---|---|
| Refinance loan amount | $100,000 |
| Loan term | 20 years (240 months) |
| Points paid | $4,800 |
| Monthly deduction ($4,800 ÷ 240) | $20 |
| Annual deduction ($20 × 12) | $240 |
Seller-paid points: If the seller pays points on your behalf, you (the buyer) can deduct them — but must reduce your home's cost basis by that amount. Early payoff: If you're amortizing points and pay off the mortgage early, you can deduct remaining unamortized points that year — unless you refinance with the same lender, in which case you continue amortizing the old points alongside any new ones.
Sources
- 1.IRS — Publication 936: Home Mortgage Interest Deduction
- 2.IRS — Home Mortgage Interest Deduction FAQ
- 3.IRS — About Form 1098: Mortgage Interest Statement
- 4.One Big Beautiful Bill Act (P.L. 119-21) — §§ 110201–110203, Mortgage Interest & Insurance
- 5.Thompson Greenspon — Interest Expense Updates from the OBBBA
- 6.Charles Schwab — One Big Beautiful Bill Act Tax Cuts
This content is for educational and informational purposes only and does not constitute financial, tax, or legal advice. Consult a qualified professional for guidance tailored to your situation.